HP-Compaq merger suffers major setback

In a potentially devastating set-back for CEO Carly Fiorina, one of HP's

largest institutional shareholders announced Tuesday that it will vote its 24.7

million shares (1.3 of the company's stock) against the Compaq merger.

Meanwhile, HP director Walter Hewlett disclosed that HP had planned to pay

Fiorina a seemingly outrageous $70 million over 2 years for managing the

integration of the two giant organizations.

Fiorina may have felt that money slipping through her fingers Tuesday when

Brandes Investment Partners LP, HP's 14th largest shareholder, announced it will

vote against the merger. The company joins the Hewlett and Packard families, who

control about 18 per cent of HP's stock in opposing the merger.

Brandes managing Partner Charles Brandes said that his company opposes the

$24 billion deal and instead favors the ''focus and execute'' strategy proposed

by dissident board member Walter Hewlett. That strategy calls for HP to focus on

its high-profit printing and imaging business and improve its position in

enterprise computing through selective small acquisitions.

The merger vote has been scheduled for March 19. With polls showing strong

internal opposition to the merger and the possibility of other institutional

investors following suit, the merger now appears to have less than a 50 per cent

chance of getting shareholder approval. Meanwhile, Hewlett filed a report with

the Securities and Exchange Commission stating that HP has refused to disclose

plans to provide huge financial compensation for CEOs Fiorina and Compaq's

Michael Capellas.

Hewlett believes that the details of the compensation packages could be an

important fact shareholders would take into consideration when evaluating public

statements by Fiorina and Capellas with regards to the merger.

Under the terms of the compensation packages that were contemplated at the

time of the merger announcements, Fiorina and Capellas would have received

compensation valued at more than $115 million. Hewlett said the HP board came up

with a two-year contract for Fiorina worth $69.8 million in salary, bonuses and

new stock options. The board also drew up plans to give Capellas - who would be

president and chief operating officer of the new HP - $47.6 million in salary,

bonuses and options over the same period.

HP rebutted Hewlett saying no such plans ever existed and accused Hewlett of

trying to mislead investors. But the plans were clearly detailed in minutes of

HP's September 20 board meeting. The plans were later tabled until after the

merger had been approved. Rather than a bonus for completing the merger, Hewlett

said, HP is planning to give the two CEO huge pay increases instead.

The disclosure of the huge compensation plans cast a dark cloud over the

sincerity of Fiorina's and Capellas' earlier withdrawal from $8 million and

$14.4 million retention bonuses they were expecting to receive upon shareholder

approval of the merger. At the time they said they withdrew from the bonus plan

in order to avoid the appearance of conflict of interest.